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AAFAF buys parametric insurance policy to meet FEMA requirements

The Government of Puerto Rico, through the Fiscal Agency and Financial Advisory Authority (AAFAF, in Spanish), announced it has acquired a parametric insurance policy that satisfies a financial assistance eligibility requirement under the Federal Emergency Management Agency’s (FEMA) Public Assistance Program.

Parametric insurance is a relatively new approach to the market that protects policyholders against specific events by paying a fixed amount based on the magnitude of the event when the parameters established under the policy are met. This differs from a traditional indemnity policy, whose payment is based on the magnitude of the losses.

AAFAF Executive Director Omar Marrero said that getting the parametric insurance, worth $32 million, also represents a step in achieving a greater degree of resilience in the face of the possibility of weather events like hurricanes Irma and María in 2017.

“In addition to complying with FEMA requirements, this policy provides us with additional capacity to respond effectively to a catastrophic event and will help expedite recovery and mitigation efforts,” he said.

By activating coverage based on the magnitude of an event, the government of Puerto Rico now has protection that is no longer limited to actual material losses, which allows it to cover a greater part of its economic loss and reduce the protection gap between the amount that FEMA requires under the obtain and maintain (O&M) requirement and what traditional insurance products already purchased by the government cover, Marrero explained.

Secondly, by using the system of pre-established parameters, Puerto Rico will receive funds faster — occasionally in a matter of days or weeks — compared to the months or years that it could take under a traditional indemnity contract.

“This newly created hybrid plan will create a pragmatic and actionable blueprint to begin bridging the O&M protection gap,” said Marrero.

Under the O&M requirement, subrecipients — meaning municipalities, agencies, public corporations and private nonprofit entities under the Public Assistance Program — must obtain and maintain insurance that is at least equal to the amount of damage eligible for the specified hazard on the properties receiving assistance. In the event that the subrecipient does not comply with this requirement, FEMA may deny or waive federal assistance in the current disaster and deny future assistance for the facility.

This applies to all permanent property that receives more than $5,000 in assistance from FEMA, Marrero explained.

Insurance Commissioner Alexander Adams-Vega explained that if the required level of insurance coverage cannot be obtained or maintained, program subrecipients may apply for an Insurance Commissioner’s certification.

Although the Office of the Insurance Commissioner cannot waive federal insurance requirements for projects established by FEMA, it can assess and certify the reasonable amount of insurance necessary to protect against future loss.

With this new parametric insurance program, the government is gaining additional coverage capacity to be added to traditional insurance programs, showing its effort to comply with FEMA’s insurance requirements, the commissioner said.

“This parametric coverage will provide supplemental protection against catastrophic hurricane or earthquake events, which represents an increase in the levels of protection of the insurance program of government agencies for future events,” he added.

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This story was written by our staff based on a press release.

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